What a Tax Bracket Actually Means

A tax bracket is simply a range of income taxed at a particular rate. A progressive tax system is built out of several of these ranges stacked on top of each other, each one starting where the previous one ends. The bracket itself isn't a rate applied to a person — it's a rate applied to a specific slice of income.

Here's a fresh illustrative example, with different numbers than Level 1 used, just to show the same idea holds no matter what the specific figures are. Imagine a system with four brackets: 10% on income up to $15,000, 20% on income from $15,000 to $45,000, 30% on income from $45,000 to $100,000, and 37% on anything above $100,000.

Illustrative bracket structure (not real rates from any country):
  10% on $0 – $15,000
  20% on $15,000 – $45,000
  30% on $45,000 – $100,000
  37% above $100,000

A tax bracket is a range of income taxed at a particular ____.

The dollar amounts separating brackets, like $15,000 or $45,000 in the example above, are called bracket thresholds. Crossing a threshold doesn't change how the income below it is taxed — it just means any additional income earned past that point starts being taxed at the next bracket's rate.

In the illustrative four-bracket example above, what happens to income between $45,000 and $100,000?

A tax bracket applies a single rate to a person's entire income, rather than to a specific slice of it.

Keep this bracket structure in mind, since the next lesson uses it to directly debunk one of the most persistent myths in personal finance: the idea that earning more money can somehow leave you with less.